Financial Markets
Core rules
- Financial markets mobilise savings and channel them to investors.
- Money market: short-term funds up to one year. Instruments include treasury bills, call money, commercial paper, certificate of deposit and commercial bill.
- Capital market: long-term funds. Instruments include equity shares, debentures and bonds.
- Primary market issues new securities through an IPO or rights issue. Secondary market trades existing securities on stock exchanges.
- Stock exchange functions: liquidity, price discovery, safety and risk spreading. SEBI regulates the securities market; it is not an exchange.
- A depository such as NSDL or CDSL holds securities electronically; a demat account enables electronic holding and transfer.
Worked example
A company issues 10 lakh new shares to the public through an IPO. The money goes to the company in the primary market. After listing, an investor buys 100 shares from another investor on NSE; that is the secondary market, and the company receives nothing from that trade. The shares are held in demat form. Reasoning: primary means first sale by the issuer; secondary means trading among investors.
Traps
Do not call a stock exchange a primary market. Treasury bills are money-market instruments, not capital-market instruments. SEBI does not fix share prices. A demat account holds shares electronically; it is not a bank account. Commercial paper is unsecured short-term debt, not equity.